On personal finance.

Avoiding Probate Not Onerous, But Requires A Plan

December 10, 2000|By Kathy Kristof, Tribune Media Services.

Robert, 67, and Nora Johnson, 66, have four sons and an investment portfolio that has grown rapidly over the last several years. So when their seniors-oriented apartment complex in Redondo Beach, Calif., sponsored an estate planning course, they were front and center, lobbing questions on how to save on death taxes and probate fees.

What the Johnsons learned is worth remembering: It's easy for most American families to avoid probate fees and estate taxes; it simply requires some planning. And most of what needs to be done costs very little or nothing.

"You can do a lot on your own," says Ed Long, executive director of Healthcare and Elder Law Programs Corp. in Torrance, Calif. In the case of probate avoidance, Long says, many of the tools are free.

Many valuable estate planning tactics also are free. Some cost a few hundred dollars, but given that they can save your relatives hundreds of thousands of dollars in taxes, they're well worth the cost.

Before diving into the money-saving strategies, it's important to understand that death taxes and probate fees are two different animals. The tools you use to save on one don't necessarily help you with the other. Also remember that estate taxes are levied by the federal government and probate fees are determined by the state. So your probate strategy should be determined by where you live. In California, probate fees are high and the process is time-consuming and often onerous.

Naturally, neither probate fees nor estate taxes are paid until you're dead and gone and then they're deducted from the value of your estate, so you may opt to leave the problem to your heirs. But if you want to save them time, trouble and expense, make probate avoidance a priority.

So what is probate?

Probate is a legal process that aims to settle the financial claims against an estate and distribute remaining assets to the proper heirs. In some cases, such as when the decedent has a great deal of debt or is involved in substantial litigation, letting the estate go through probate can be beneficial, says Peter Pettler, a Los Angeles-based probate attorney.

That's because the process gives creditors a limited amount of time to submit claims against the estate. After that period, the estate is closed. Heirs do not have to worry about a creditor coming after their inheritance once probate is complete.

However, for those without a lot of debt, probate has serious disadvantages.

For example, it typically takes seven to 15 months for an estate to go through probate in California. Probate fees are assessed based on a statutory formula that charges a percentage of gross probated assets--all the assets that are in the probate estate--without accounting for encumbrances such as mortgage debt. Even in the best of circumstances, that fee structure almost guarantees the fees will amount to thousands of dollars.

A $150,000 estate, for example, would pay $4,150 to the probate attorney, who takes the probate case through court. The executor of the will, who hires the probate attorney and looks after heirs' interests, could charge an additional $4,150. (Some executors who are also heirs waive their fees because they are considered taxable income. If you inherit the money, it's not subject to income tax.)

But there are two instances when probate, even in California, is simple and cheap. One is when there is a surviving spouse. The other is when the probate estate is worth less than $100,000.

Surviving spouses file a "spousal property petition," which generally takes a few months to process. Heirs of estates worth less than $100,000 can file a "small estate affidavit." That shortens the time it takes to disburse the money to 40 days.

What if you have no surviving spouse and your estate is worth considerably more than $100,000? The trick to reducing probate fees is to trim the amount of assets that must go through the court, Long says. That is fairly easy to do, particularly if the bulk of your assets consists of life insurance and retirement, bank and brokerage accounts.

These policies and accounts allow you to name a beneficiary to whom the account should go in the event of your death. If you have named a beneficiary who outlives you, the money goes directly to him or her. The beneficiary simply must bring a copy of your death certificate and the naming document to the bank or broker and the account is his. The naming document would be a copy of the beneficiary designation or "pay on death" form from a bank.

If that has been done, the asset never becomes a part of your probate estate. Consequently, it's not subject to probate fees, and beneficiaries have no legal right to the assets before you die.

Avoiding probate is not quite as easy if you own real estate. There is no way to name a beneficiary on the deed to your home, for example. If you want to avoid probate on this asset, you have two choices: You can give the eventual heir a right to it by naming him a "joint tenant" or by giving him a gift of a partial interest in the house; or you can set up a living trust.